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There is one other argument. The Prime Minister has been saying recently that the days of laissez-faire capitalism and market fundamentalism are over. With great respect to him, they are not. The whole Goodwin display of
shameless greed and the enormous bonus awards for failure of the RBS and HBOS directors just make monkeys out of the Government, as do also the extraordinary contortions dreamt up by Barclays to preserve its bonus culture intact, from Bob Diamond’s £36 million a year downwards, plus its aggressive, convoluted tax havens maze, robbing the taxpayer of, it has been calculated, about £1 billion a year. Against that background, as we have seen in the last few days, the Chancellor is reduced to publishing soon a code of practice, which is not enforceable, unless he makes it enforceable in some way, stating that the banks are expected—expected—to obey the spirit as well as the letter of the law. I can only put it to the Chancellor that the only way to end this humiliating charade, with the banks running rings round the Government, is public ownership. I am quite prepared to say that it should be temporary; I am not in favour of public ownership for its own sake, but—temporarily at this time—it seems to make a hell of a lot of sense. That is the only way we can achieve what is needed.
It is almost incredible that such an obvious common-sense solution is derailed because of extreme ideological aversion even to the faintest whiff of public ownership. It exposes more sharply than anything that I can think of in recent years just how deeply embedded is that ideology in the minds of the political and economic leadership of this country. That probably applies to both parties. I think it is the defining element of the neo-liberal era. Adopting the most obvious, pragmatic and appropriate solution to public ownership at least cost in the current financial meltdown is not an ideological stance, but rejecting it out of hand certainly is, and the Government should think again.
4.38 pm
David Davis (Haltemprice and Howden) (Con): It is always a pleasure to follow the right hon. Member for Oldham, West and Royton (Mr. Meacher) because he matches eye-watering damage to the economy with eye-watering honesty, and we always know that he means exactly what he says on these issues. I suspect that many Opposition Members agreed with probably three quarters of his analysis, although perhaps not the last few words.
We are not unused to hearing people now argue that this is the end of free market capitalism or the fault of free market capitalism. We are also used to hearing people refer to the 1930s and cite Keynes as the solution. With that in mind I had a look back at what I remembered from a biography of Keynes and found one of the last things that he said about resolving some of the economic problems of his day—not that dissimilar from those we face today. He said:
“I find myself more and more relying for a solution to our problems on the invisible hand which I tried to eject from economic thinking 20 years ago.”
So he, after two world wars, the tragedy of the gold standard and the tragedy of the 1930s, during which many of our grandfathers spent their time on marches or hunger marches, he came back to the thought that whatever we do, the answer to a recession, the answer to a depression, is to make the economy grow again. What we must not do, in curing one of the problems that we have, is poison the whole economy.
I shall go through Keynes’s analysis, but come to a slightly different conclusion. He also recognised, probably
more than any economist before him, the importance of confidence; he first referred to it as “animal spirits”, the driving part of the economy. He recognised that confidence was ephemeral, but that it was not irrational.
If it is difficult to raise capital and get loans, if markets are uncertain and if there are problems of demand or lack of demand—indeed, if there are prospects of high taxation in the future—confidence is enormously harmed. My point is that the Government’s management of this issue in the past year or two has added dramatically to our problem; it has reinforced the position highlighted by the IMF—that we will probably face a longer recession than anybody else. There are many other structural reasons, but that is one of them.
At first, that was almost inexplicable to me. Why were the Government so slow, timorous and ham-fisted about their handling of the banking crisis? After all, there is no shortage of examples of how—and, indeed, of how not—to handle one. Anybody who understands capitalism will recognise that banking crises are not that unusual. They happen quite a lot, and there have been a few in the past decade or so. This is not a new point, but it is now widely recognised that the Swedish banking crisis was handled well and that the Japanese one was handled badly. Interestingly, the Government have mimicked not the Swedish example, but the Japanese one. What is the difference? Each country started—like all Governments, ours included—by underwriting the bank depositors. That was quite right; that is how to stop a run on a bank. It is straightforward, although expensive in some senses, and it has to be done. There is no choice about that stage.
It was in the second stage that the Government deviated from the Swedish example. I hope that the House will forgive me if I recount that example. The Swedish Government said to their banks, “You will identify the full extent of all your losses and liabilities before anything else happens. If you do not, there will be no support.” That is a clear and brave thing to do; perhaps our Government did not do it because it is so brave. What is the advantage of that approach? First, it makes the shareholders meet the losses first, as is entirely proper in a capitalist economy; that also reduces the taxpayers’ loss. Secondly, it pre-empts all the problems of bonuses, pensions and pay-offs that shame all of us who believe in a free market economy. Shareholders who have just lost their entire wealth are not about to stand for that sort of behaviour; Lord Myners might, but those shareholders, I am afraid, will not. Thirdly, the approach identifies the banks in three categories: those that do not need help; those that can reasonably use help to serve the nation’s needs for borrowing and industry capital formation; and those beyond recall—those now known in the parlance as the “zombie banks”, which are the dead banks to which we are still giving transfusions of taxpayers’ money.
The approach is tough, but it is a necessary precursor of what we should have done in this crisis. That shock action in Sweden stopped what is known as a liquidity asset spiral—the continuing reduction of the assets on which the banks base their value and activities. It was predicted that the disposal of toxic assets in Sweden would take 10 years; the vast majority was done within three years. What was the cost to the nation? If we count interest, it was 2 per cent. of GDP; if we do not, it was nothing—zero—because the issue was addressed
up front. The action stopped, throughout the whole Swedish economy, what is known by the technicians as payment uncertainty: the fear that the next customer will not pay the bill, and the fact that someone cannot get credit insurance. Such things vanish when the problem is dealt with.
Mr. MacNeil: I am listening carefully to the right hon. Gentleman. Before the Government intervened, people in the press were highlighting what had been done in Sweden. The Government seemed to adopt, as he said, what the Swedes did, but a toxic bank has not been set up to carry toxic assets in this country. I would like to hear his views on that.
David Davis: The Government did not do what the Swedes did. They did not carry out that up-front identification. The best example of that came during the past couple of days in relation to the Lloyds-HBOS merger, which was forced through incidentally by stopping the action of our competition laws. That was wrong; this is what they are for to a certain extent. The merger was forced through so fast that Eric Daniels, an extremely good banker until this point, had to admit to the Treasury Committee that he did not carry out due diligence. It is the first time in my political and business career that I have ever heard of a major acquisition taking place without due diligence. What have we done? We have taken one destroyed bank and probably created two destroyed banks. Once we have the relevant information, we can make rational decisions about what to do about individual banks. If a bank is dead, it does not mean that the depositors disappear or that the loans disappear, but it is necessary to break it up and parcel out the components to others who can better manage them. That did not happen in this case, and it was a great failure. I am sorry to say that it amounts to a failure of courage.
I only have a few minutes, so I shall talk briefly about the Turner report, but before I do so, I will make just one comment on the other aspect of demand management—handling the other elements of the downturn in the economy. There are good reasons for public works investment during a recession, but probably demand management is the least good of them. I do not have time to go into the matter in detail, but all we have to do is look back at the supposed great revolution of Franklin Delano Roosevelt in the United States. In the 1930s, the United States had five years of bad recession, and did not recover to its trend growth until 1942, in the middle of the second world war. We had Treasury officials who were very old-fashioned and resisted Keynes, and we had two years in recession and were back on trend by 1937. We ought to be a bit careful about assuming that such actions will work because they carry a lot of consequences.
We have a structural problem to deal with. I mentioned to the hon. Member for Twickenham (Dr. Cable) earlier that the US and the UK have independently pushed their aggregate spending way above GDP—to 3 or 5 per cent. above that level. That is a detailed variant of a structural problem in the world as a whole. In America, household consumption is 70 per cent. of GDP; our household consumption is about 63 per cent. of GDP; and Chinese household consumption is 40 per cent. of GDP. The consequence is a massive flow of money,
which still goes on and is unsustainable at those levels. At the end of the day, whichever Government deal with the matter will have to resolve the problem in the long run of bringing aggregate spending into line with our economic capabilities.
I have only had a chance to see the summary of the Turner report because a copy has not been put in the Vote Office—at least not when I was able to go there. In essence, Turner calls for anti-cyclical asset requirements, which is very sensible. That policy did not save Spain, mind you, but by itself it is worth while, although not a game-taker. He calls for a general increase in capital-asset ratio levels, which is fine. That is very sensible, but expensive for the banks. He asks for balance sheet rules specific to risk, which is also sensible.
I really would like the Minister to respond to what I have to say on the FSA’s attitude. Historically, the attitude of the FSA has bordered on the criminal, partly because it has been the victim of a massive confusion of aim. For example, there used to be something called the regulation T scale. It encouraged the movement of assets from American balance sheets to British ones because they did not meet regulations properly put in place in New York, which were set out by the Securities and Exchange Commission in its regulation T. That was actively encouraged by the FSA, with the result that we had a large quantity of poor-quality assets on British rather than American balance sheets. We should ask, for example, why nearly all of AIG’s losses were in London, why so much of the securitised mortgage asset base was in London and why most of the companies involved will never pay taxes in my lifetime because of their accumulated losses. That situation is the result of a massive confusion of aim by the FSA, which actively encouraged it in the fond thought that it was a way of helping the City of London. In fact, it brought very low-quality business to the City.
The problem is that checklist regulation almost never works very well. That is what the FSA is based upon—a tick-box approach to regulation. It is worse in complex systems, because people find ways around it, and in fast-changing systems. When the two of those come together, as in most of the investment banking sector, there is a very difficult problem to resolve. The intelligent thing to do is separate out the part of that sector which matters most to us and the economy and which we cannot afford to fail—namely the high-street and commercial banks.
The real answer—not the short-term answer but the long-term structural answer—must be to separate the commercial banks from the investment banks, so that we can regulate the commercial banks tightly, ensure they provide capital for everything from mortgages to business loans. At the same time, that would enable us to allow a much lighter regime for the area that needs to be innovative. That is not just my view but that of Paul Volcker, Nigel Lawson and, I gather from what the hon. Member for Twickenham said, the Governor of the Bank of England. That seems to me the only way ahead for our financial sector.
Mr. Deputy Speaker (Sir Alan Haselhurst):
Order. To use the lingua franca of the day’s debate, I intend to impose a light touch of regulation and reduce the
Back-Bench speaking time to 10 minutes when I call the first hon. Member after 5 o’clock, to try to accommodate more Members.
4.52 pm
Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): It is a pleasure and a privilege to take part in this debate. When I looked at the Conservative motion, I thought it was somewhat lightweight and out of touch, that it did not address the issues and that it was politically provocative. I have to say that the speeches that we have heard, including those from Conservative Members, have not been like that. A number of them have been very thoughtful and interesting. I have not agreed with all of them, although I have found myself in agreement with certain elements.
During the speech made by the hon. Member for Twickenham (Dr. Cable), we were getting into a debate about what was good debt and what was bad debt. I had thought about that before, but I began to focus on it in a way that I hope is a bit more effective. In debates such as this in the past, we have all had strong views about what levels of deficits on borrowing are sustainable in the economy, what level of long-term debt we could live with and the role of automatic stabilisers, which is a big issue between the United States and Europe. We have all had views about regulation, and most of us who have taken part in these debates over the years have words to say about it.
The conclusion that I am coming to is that it is actually best for us to forget about what we have said in the past. Perhaps it will be relevant when history is written, but we will not move forward as a nation if all we do is throw abuse at each other about what we have said about these and other issues over the 10 or 20 years for which some of us have been in the House. Some of us have been in the House a little longer and have doubtless thrown the abuse for longer.
I got things badly wrong in a speech that I made in my constituency about 14 months ago, when I said I did not believe that there would be a severe world recession. I believed that the Chinese and Indian economies would be sufficiently buoyant to ensure that the rest of the world did not get dragged into a deepening recession. When I campaigned for the then Senator Obama in Illinois in June, I took the opportunity of visiting a banking friend in the United States, and he said, “You’ve got this wrong. This is pretty serious—we don’t know how bad it is, but it’s grim.” That is where we are now.
I do not know whether the recession is the equivalent of what we had to endure in the 1990s or the 1980s, or something that we experienced in recent history only in the 1920s and the 1930s. The right hon. Member for Haltemprice and Howden (David Davis) quoted Keynes. I do that occasionally, but I would like to cite a neo-Keynesian this afternoon—J. K. Galbraith. When he gave evidence to the congressional committee on the economy in 1954, when the Americans believed that another fairly deep recession might be beginning, he said that the problem in 1929 and, to some extent, in 1954, was where the wise got their wisdom. That is our position in 2009.
We are all in territory of which we have little experience and where we have little background on which to draw. In many ways, we are making a stab in the dark. President Obama recognised that when he told the
United States Congress that the Administration would give unprecedented amounts of money to try to stimulate the economy, but that it might not be enough and that they might have to go far further in future. We are all in that position, and it is not easy.
I am supposed to be a little party political in my contributions. Conservative Front Benchers did not do justice to the debate about where we are as a nation and where the international economy is. Some Conservative Back Benchers did justice to it, but Front-Bench Members did not address the matter. Why? Are they frightened to tackle the real issues because the drift is against the ideological one that they want to offer the country? Are they unprepared to face up to the new economic situation? The hon. Member for Twickenham reminded us of historical debt and that it is not especially high at the moment. It has been much higher in wartime.
If one is trying to build consensus in the nation, which requires a policy of economic stimulus that depends on building up long-term debt—there is no other way for any nation in the world; although debt has been 40 per cent. of GDP in the recent past, all the predictions that I have seen are that, in the United States, Germany, Japan and other countries, it will increase to 60 and 80 per cent., and we will be with the rest of world—one cannot rubbish the concept of national debt. One cannot have an economic stimulus, which has an immediate effect, unless one runs a higher deficit than in the recent past.
Broadly speaking, according to exchange rate mechanism rules, recent deficits have had to be within 3 per cent. They are moving ahead of that in all European Union countries, and that will happen in Britain. If Conservative Front Benchers believe that an economic stimulus under some international agreement is essential to get Britain out of the economic recession—or depression—they cannot rubbish deficit financing, which is a crucial part of it.
David Davis: Let me make two points about the hon. Gentleman’s comments on debt. First, as I said to the hon. Member for Twickenham (Dr. Cable), we are no longer a reserve currency and our credit worthiness is now in question. Two countries have already had their credit worthiness reduced. Secondly—this is a problem that the hon. Member for Twickenham did not address—there is overall external debt, private and public together. It is now about 400 per cent. of GDP, three quarters of it payable in the next year. We have a serious credit worthiness problem and, if we go over the cliff, that will do much more harm than small-scale public spending.
Mr. Henderson: I understand the right hon. Gentleman’s point, and if I had stuck to my speech I might have come to it myself. However, as long as we are moving broadly in line with the changing debt and deficit financing levels of comparable countries—the United States, Germany, France, Japan and so on—and as long as we are moving on the same track, even if it is an upward track, I would not expect that confidence to go. As long as that confidence does not go, the relative strength of the currency will be retained. I understand the worry, but with a little careful engineering, we can avoid falling into that trap.
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